In my last report, dated February 8^th, I started off by saying “Gold is currently trading off drafts created by the ongoing Greece financial drama and the possibility of quantitative easing programs coming back, not only here in the US, but abroad as well.” As it turned out, that statement proved correct. Gold has propelled higher for the past couple of weeks and just recently made new highs for 2012.

Greece’s drama continues to play out, with things looking much better in the near term for Greece since the EU, ECB and IMF have all done what they had to in order to effectively “kick the can down the road” and save Greece from financial ruin. What remains to be finished is approval by some European parliaments, approval by private lenders to take a 53.5% loss on the face value of bonds they hold, to accept substantially lower coupon rates on the new bonds they’ll receive and swap them. While it’s a lot for the lenders to swallow, what choice do they have? They either accept this or get zero.

An issue Greece will soon face is whether overseers of the troika who loan the funds to Greece believe Greece is working hard at meeting the agreed to austerity measures. It’s my belief that all Greece need do in the near term is go through the motions of doing what is asked of them. It doesn’t matter at first if it succeeds, as I think Greece will be measured on effort nor results at first. Down the road results will be very important, but given how unpopular the austerity measures are with the Greek population, don’t expect miracles.

In terms of price action, the Eurocurrency has broken out in terms of price action. In but six weeks, prices have rallied from a low of 1.2627 made on January 13^th to a high of nearly 1.3469 today. Both longer and shorter term chart action is bullish for the Eurocurrency. As the Euro moves higher, the Dollar Index often accompanies it with a price break. This time around is no exception and this is benefiting gold prices.

Iran is the current “hotbed” of the world. The threat by Iran to block the Strait of Hormuz is being taken as a real threat by traders and users of crude oil. How much of a price premium this threat has injected into oil’s price structure is anyones guess. My estimate is about $15-$20 a barrel, but admitedly it’s strictly a guess, not something I can quantitatively back up. If the Strait of Hormuz was closed by Iran, I would expect to see an instant jump in oil prices, one that could double the current premium in a very short period of time.. but that premium could be taken out just as fast as its put in once Iran’s military is put down.

My rationale is that NATO would deal a swift defeat to Iran’s military. If Iran attacks the Strait of Hormuz, ships traveling through it or unleashes mines in the Strait, hoperfully NATO force action, similar to that seen in Libya would be unleashed. Military experts I’ve listened to expect a short Iran’s military lifespan under a NATO assault. A side benefit might be that it opens the door for an attack on Iran’s nuclear facilities by NATO and/or Israeli forces working together. Whomever hits Iran would have the background of the war acting as smoke screen, which means the attack on nuclear facilities would most likely get tied into war coverage as “acts by the West to protect itself”. I’m not a war starategist, but this doesn’t seem out of whack to me.

Europe and Japan are now adjusting to life without Iranian oil. Despite Iran’s request to Saudi Arabia to not to make up the difference in lost Iranian sales to Western world markets, Saudi Arabia has publically assured the market it stands ready to make up that difference. The Saudis and Iranians have different interests.

The odds favor that Iran continues to make theats, but doesn’t carry out military action. The threats should be enough to keep a bid under oil prices and that bid keeps gold on breaks supported. There is a wildcard. The wildcard is that if things stay this way, it gets harder and harder to figure out what Israel decides to do. Time is Israel’s enemy as the ruling government in Iran has said it will not stop its nuclear program and each day that goes by brings Iran closer to a nuclear weapon. Will Israel sit by or not will not stay in the background very long.

Last and possibly as important is the quantitative easing being done around the world. Greece was saved by fancy accounting that made sure that European central national banks lost nothing as the public takes a financial beating. Funding of strategic reserves in Europe will most likely come from printing of money just as the UK has recently done. Another round of low interest bank loans in Europe gets underway on February 29^th. Last time over 500 banks particpated, getting 3-year loans of 1%, totalling over EUR 489 billion. Expect at least that this time around. China is lowering its bank reserve ratio rates. Money is flowing.

The chart below is published with permission of the Moore Research Center, Inc.

For simplicity purposes, I have only published what a Bull Year looks like given that there’s no reason to yet consider a Bear Year in my opinion.

A price runup in January and February is not an uncommon event as seen on the above chart which displays both 5 and 15-year chart patterns. Both patterns seem to consolidate a bit in March and April before moving up again in May. A pullback from a peak made in May often leads to a beak into early September and after that more upward price momentum. Keep in mind that I have filtered the above chart to only show what occurs in bull years.

Will this pattern be followed? It’s hard to tell given the inherent limitations that past performance has on price predictability. However, it’s hard to get away from the idea that Iran either does something to provoke a military confrontiation or Israel finally takes military action to protect itself. If either occurs gold probably moves even higher off that event.

Bollinger Bands are displayed as “Black Dashed Lines”. The theory behind them is that prices tend to trade within these bands 95% of the time. When prices rally to the top band, that find this an area of initial resistance and when prices break to the bottom band, they often find it to be an area of initial support

Prices just hit the top band and have temporarily broken back a bit. This is often in keeping with how bull markets work. Prices stay close to but under the upper band.

Support is down at the 18-Day Moving Average of Closes, which at the time of this publication is 1743.2. What I would not want to see is prices break under 1706.7, the last break low as depicted by the Swingline, the “brown thin line” as shown on the chart.

As I was getting ready to write my summary, I received as you can through our Linn Group Research, an e-mail with a speech entitled;

Speech by CFTC Commissioner Bart Chilton - Speculators and Commodity Prices—Redux  February 24^th.

I think the highlight of his speech was his quoting of this: “a Goldman Sachs study last year stated that each million barrels of net speculative length in the markets adds as much as 8 to 10 cents to the price of a barrel of crude oil. As of February 23, 2012, the CFTC Commitment of Traders Report showed that “managed money” held net positions in NYMEX crude oil contracts equivalent to 233.9 million barrels. Using the Goldman Sachs research figure, and multiplying 10 cents times 233.9 million would mean that, theoretically, there’s a “speculative premium” of as much as $23.39 a barrel in the price of NYMEX crude oil.”

If accurate, this quantifies an even higher Iranian oil premium than my guess at a $15-20 a barrel premium.

So far there hasn’t been a lot of talk about high energy prices curtailing US economic growth. However, it’s hard to not think about inflation as energy prices keep surging. As they do, this will raise the price of goods. Have you bought an air ticket recently? Filled your car’s gas tank?

If the answer to counter this is the printing of money, which to date it has been, than gold should ultimately go even higher. Governments have found that the trick is to keep economies moving along, while printing money to be able to absorb rising costs.

As a speculator, you have to keep risk controls in place. Chart patterns are a way to see what is going on, but in this environment its outside forces that will remain as the forces that drive where gold goes.

Until April gold breaks $1706.7, a long position, ideally on a price break back to the 18-Day Moving Average of Closes is warranted. I did not print the Slow Stochastic reading on the Daily Chart, but it is in overbought territory. If it embeds, prices could get to the $1850 price level in short order.

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Disclaimer: This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is taken from sources believed to be reliable, but is in no way guaranteed. Chart data is courtesy of LGP-IraCharts. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures and Options on Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from The Ira Epstein Division of The Linn Group, Inc. or The Linn Group, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are not indicative of future performance.

-- Posted Friday, 24 February 2012 | Digg This Article